Beset By Pension Woes, Illinois Postpones Muni Bond Sale

By Michael Aneiro

The Land of Lincoln is becoming better known as the land of credit risk and ballooning underfunded pension obligations. The state of Illinois continues to not impress muni bond investors, and its latest missteps led Illinois Wednesday to postpone a planned $500 million general obligation bond sale, a rare occurrence in the relatively staid world of muni bonds, particularly state GO bonds.

Illinois – already duking it out with California for the title of lowest-rated state in the U.S. – postponed the deal after it was on the wrong end of some more recent credit-rating actions. Kelly Nolan and Mike Cherney report in the Wall Street Journal:

The state attributed the rare delay to a recent Standard & Poor’s downgrade and a decision by Fitch Ratings to put the state on negative watch for a downgrade. S&P and other credit raters have grown gloomier on Illinois’s finances as the pension deficit lingers with no timetable for the legislature to address it.

Illinois also has problems beyond its pension. According to state Comptroller Judy Baar Topinka, the state has a backlog of more than $9 billion in unpaid bills. A temporary income-tax increase, approved in 2011, expires in 2015, and that could open up fresh budget issues down the road as Illinois faces “steep increases” in annual pension payments, according to Fitch.

The issues now seem to have metastasized enough to give potential investors pause….

“Our conversations with potential bidders lead us to believe the market is unsettled because of recent actions and comments by the bond-rating agencies,” said Abdon Pallasch, the state’s assistant budget director. “We plan to schedule a new bond sale after the markets have had time to digest the news.”

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.